Investor psychology in Capital Market

DH review how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource missallocation. DH argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market participants. In financial economics, the most salient example is the efficient markets hypothesis. The efficient markets hypothesis reflects the important insight that securities prices are influenced by a powerful corrective force. If prices reflect public information poorly, then there is an opportunity for smart investors to trade profitably to exploit the mispricing.

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In recent years, some finance researchers have returned to such a broader conception of economics, and have denied market efficiency its presumption of innocence. This denial is based upon theoretical arguments that the arbitrage forces acting to improve informational efficiency are not omnipotent. 
 

Besides that, DH show how imperfect rationality affects trading, expectations and prices in capital market

1. Investor often do not participate in asset and security categories

A focus on what is salient may cause investors to invest only in stocks that are 'on their radar screens; Non-participation may also be related to familiarity or 'mere exposure's effects, e.g., a perception that what is familiar is more attractive and less risky

2. Investor use past performance as an indicator of future performance in mutual fund and stock purchase decision

3. Investor trade too aggressively

Volume is too large is hard to establish without benchmark rational level of volume. Rational dynamic hedging strategies, in principle, can generate enermous volume with moderate amount of news.

4. Investor do not always form efficient portfolios

Generally of course. Several experimental studies examined portfolio allocation when there are two risky assets and a risk-free asset and returns are distributed normally. People often invest in inefficient portfolios that violate two-fund separation, though trained MBA students do better :(

5. Certain classes of investor and their agents change their behaviors in parallel

This phenomenon, called herding, is consistent with rational responses to new information, agency problems or conformity biases. The tendency of analyst to follow the prevailing consensus is not stronger when that consensus proves to be correct than when it is wrong (Welch, 2000)

and many more...


Reference:
Daniel & Hirshleifer (DH)

well guys, often human is driven by their emotion... uncontrollable action that result the bad decision. there are many crazy people who want to be the winner, You should manage your emotion in stock market to eat them up.

Sponsor
well, i recommend this book and i hope it can help you
1. The Psychology of Trading: Tools and Techniques for Minding the Markets


2. The Intelligent Investor (This is the Fisrt and The Best Book that i ever read in my life time)


it's your choice,
the more you read, the more you smart to face the market...